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In his Stanford GSB lectures, Peter Thiel spoke about secrets. But he defined secrets for startups in a different way than one might expect.

A secret is not an unknown. Rather, it’s something just not widely believed to be achievable or feasible. In other words, it’s an insight, a thesis that isn’t widely held. Exploiting that secret should be the aim of every entrepreneur. Leveraging the secret means disruption and ultimately success.

There are three types of vision that a successful startup needs: product vision, business vision and team vision.

Product vision is the dream. It’s how your company changes the world. It’s the problem that you’re solving and the solution to that problem. Product visions don’t end on launch day. They extend for years through the company’s growth. A product vision isn’t a certain feature or even a completed product. It’s the state of having solved a problem for a user or providing an experience for a user. The best product visions last for decades. Think Apple.

When the core teams of a startup work in harmony, they create tremendous leverage for a business. I saw this last week with one startup I work with, Axial, a New York based company enabling private companies to access debt, equity capital and strategic acquirers.

First, the marketing team created a powerful blog post and infographic, just top-notch content marketing. This campaign creates awareness among potential target customers who become curious about the service.

Reference checks are part and parcel of the VC diligence process and most hiring processes. They are also one of the two most important analyses in hiring, next to the interview. Below, I’ve outlined my standard question set. I’m curious to hear feedback on what other questions or techniques might work.

Types of References

I find it’s valuable to speak to references who have worked with the candidate in different roles. Below is a list of typical roles in rank order.

I have been writing for three years now and it’s been a ton of fun. I hope to continue to write for many more. Along the way so far, I’ve learned a few lessons on frequency, content type, idea generation, voice, titles and distribution.

Frequency

There are two schools of thought on blogging frequency: high frequency vs high quality. At this point, it’s unclear to me which is better for building an audience because both work. Each camp has its exemplars of success.

Below is my general outline for a typical diligence process.

First meeting

When I’m meeting a startup for the first time, my goal is to understand as much about the business and team as I can.

• Founders/Team: How do the founders know each other? How do they interact with each other? Are they passionate? How qualified are they? What would it be like to work with them?
• Business: In some form, I walk through the Business Model Generation framework: value proposition, key activities, key partners, major assets, channels of distribution, customer segments, cost structure and revenue streams. Is the problem worth solving and if the startup succeeds, how valuable would it be?
• Go to market: Can the company articulate their value proposition simply? Can the team explain how they will go to market? Do they have a good understanding of the competition?
• The angle: What secret, what insight has the founding team made that the rest of the market hasn’t yet realized? What discontinuity in the market can they leverage to win large share?

After the first meeting

After a startup has left and I’m “doing diligence,” I want to test some of the assertions made by the company.

Once you have built your product and it’s in the market, there are only three things that matter: distribution (getting the product into users' hands), engagement (validating that you’ve built the right product and that users are using it), and monetization (making money from those engaged users). Some companies call this the 3 Rs: reach, retention and revenue. Whatever you call it, this is your strategy.

At board meetings, I’ve started categorizing each portfolio company’s roadmap items into these three buckets. It’s a simplification that immediately reveals the priorities of the company at any stage.

Some of our companies started financing processes in earlier this quarter. At a strategy session with one of our companies, the team and I crafted the outline of the pitch deck. They asked me what questions a venture investor might ask in the initial meeting.

Distilling the investment analysis into a small number of general questions is challenging because of the diversity of businesses we see but, I gave it a try and came up with the following questions I might ask a startup to answer in an initial meeting.

Though the industry is called venture capital, the goal of a VC isn’t to maximize every risk. Instead, we try to understand all the risks a business might face and weigh those risks with the reward - the exit. Here are the major risks that I typically review when a startup pitches.

Market timing risk - Is now the right time for the business? It’s often hard to evaluate this risk, but nevertheless, it’s an important consideration. There are many stories of people saying I invented Facebook before Facebook, which may very well be true. But the market just wasn’t yet ready for it.

When deciding if to raise a venture round, it’s critical to ensure your venture investor shares the vision for the company: both the product roadmap and the financial goals of the company.

Most founders never consider the impact on fund size on VC motivations. As long as there are enough reserves to invest as the company grows, a founder might think, that’s fine with me.

But this is naive. Fund sizes dictate a VC’s strategy. To achieve their target returns, a $50M fund and a $500M fund must pursue very different investment and management styles.